The Big Picture
The S&P 500 hit yet another record high this week. As of this writing, it is trading at 21.2x next twelve-month earnings, which is a 16% premium to its 10-year average, according to FactSet data.
That P/E multiple is the benchmark for determining whether a stock or a sector is "overvalued" or "undervalued" relative to "the market." There is more to it than that, however.
The P/E multiple is a a convenient reference point, but the underlying earnings growth rate needs to be taken into account when thinking about whether a stock or sector is overvalued or undervalued relative to the market. This is where the price-to-earnings-growth rate, or "PEG rate," comes into play. The PEG rate is determined by dividing the P/E multiple by the earnings growth rate. The current PEG rate for the S&P 500 is 1.28.
A sector trading at 24x next twelve-month earnings might look expensive relative to a market trading at 21.2x, but if that sector is expected to deliver 20% earnings growth, the corresponding PEG rate of 1.20 suggests it trades at a more attractive multiple than the market when its expected earnings growth rate is taken into account.
Below we provide a snapshot of a valuation breakdown for the 11 S&P 500 sectors centered around the P/E multiple and PEG rates. Even then, there is still more to consider in terms of a valuation analysis, but because earnings and earnings estimate trends drive the market, no P/E multiple is complete without an understanding of the earnings growth rate.
Valuation Snapshot
- 32.45% weight in S&P 500
- Trades at 30.4x next twelve month earnings -- a 54% premium to the 10-yr average
- Next twelve month PEG ratio is 1.4
- 12.32% weight in S&P 500
- Trades at 14.9x next twelve month earnings -- a 5% premium to the 10-yr average
- Next twelve month PEG ratio is 1.1
- 11.68% weight in S&P 500
- Trades at 19.4x next twelve month earnings -- an 18% premium to the 10-yr average
- Next twelve month PEG ratio is 1.0
- 10.05% weight in S&P 500
- Trades at 25.3x next twelve month earnings -- a 3% discount to the 10-yr average
- Next twelve month PEG ratio is 1.6
- 9.46% weight in S&P 500
- Trades at 19.73x next twelve month earnings -- a 4% premium to the 10-yr average
- Next twelve month PEG ratio is 1.1
- 8.09% weight in S&P 500
- Trades at 20.6x next twelve month earnings -- a 9% premium to the 10-yr average
- Next twelve month PEG ratio is 1.5
- 5.77% weight in S&P 500
- Trades at 20.4x next twelve month earnings -- a 5% premium to the 10-yr average
- Next twelve month PEG ratio is 2.6
- 3.62% weight in S&P 500
- Trades at 12.0x next twelve month earnings -- a 7% premium to the 3-yr average
- Next twelve month PEG ratio is 2.0
- 2.28% weight in S&P 500
- Trades at 16.6x next twelve month earnings -- a 5% discount to the 10-yr average
- Next twelve month PEG ratio is 2.0
- 2.15% weight in S&P 500
- Trades at 19.5x next twelve month earnings -- a 17% premium to the 10-yr average
- Next twelve month PEG ratio is 2.1
- 2.13% weight in S&P 500
- Trades at 16.8x next twelve month earnings -- a 14% discount to the 5-yr average
- Next twelve month PEG ratio is 2.7
